PARNA VASUDEVAIAH,AURANGABAD vs. INCOME TAX OFFICER, WARD-1(1), AURANGABAD

Briefly stated, the facts of the case are that the assessee was a salaried employee of Pfizer Healthcare India Pvt. Ltd. during the relevant AY. For A.Y. 2019-20, the assessee e-filed his return of income on 24/08/2020 declaring total income of Rs. 39,28,780/-.

Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A), who upheld the order of the Ld. AO and dismissed the appeal of the assessee for non-prosecution relying on the decision of the Hon. Supreme Court in the case of CIT vs. B.

We have heard the Ld. Representatives of the parties and perused the material on record as well as paper book filed by the Ld. AR on behalf of the assessee. The facts of the case are not in dispute. We find that the Ld. AO disallowed the relief under section 89 and held that the amount/ compensation received by the assessee in full and final settlement on voluntary retirement is taxable as profits in lieu of salary under the provisions of section 17(3)(i) of the Act. Perusal of the CIT(A)’s order reveals that the Ld. CIT(A) has upheld the order of the Ld. AO and dismissed the appeal of the assessee for want of prosecution without adjudicating on the merits of the case. Before us, the Ld. AR has demonstrated that the assessee had sufficient/reasonable cause for non-compliance before the Ld. CIT(A) supported by an affidavit citing the reasons for such non-compliance. It is a settled position of law that the Ld. CIT(A) should dispose of the assessee’s appeal by passing a speaking order on merits of the case in compliance with the provisions of sec. 250(6) of the Act, however, in the instant case, he failed to do so. It is the submission of the Ld. Counsel for the assessee and conceded by the Ld. DR that the impugned issue is squarely covered in favour of the assessee by catena of decisions of this Pune Tribunal and other Bench(s)/ judicial forums under the similar set of facts as that of the assessee in the present case.

We have perused decision in the case of Shrikant Anantrao Zori (Supra) relied by the Ld. AR and find that this Bench has decided the impugned issue in favour of the assessee in turn relying on another decision of the Pune Tribunal in the case of Ashok Raghunathrao Kulkarni (supra) in the identical set of facts where the assessee(s) were ex-employees of Pfizer Healthcare India Pvt. Ltd. and covered by the same financial scheme of the company.

Referring to other terms and conditions as per clause (11), the Ld. Counsel for the assessee drew the attention of the Bench to the sub-clause (viii) of the same, which reads as under: “(viii) All Employees who opt for voluntary retirement under the Scheme will not be entitled to any compensation or notice pay under the provisions of the Industrial Dispute Act, 1947 as their cessation from the employment constitutes “resignation” and does not constitute “retrenchment” or “termination of employment” by the Company”.

Referring to the provisions of section 17(3) of the Act, the Ld. Counsel for the assessee submitted that the same are not applicable to the facts of the assessee, which reads as under: “17(1)…. 17(2)…. (3) "profits in lieu of salary" includes— (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10; (iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person— (A) before his joining any employment with that person; or (B) after cessation of his employment with that person.”

So far as sub-clause (ii) is concerned, the Ld. Counsel for the assessee referring to the various decisions submitted that this clause is also not applicable. He submitted that the amount received by the assessee is not a compensation but on account of loss of pay. Referring to the decision of the Hon’ble High Court of Calcutta in the case of CIT vs. Ajit Kumar Bose (1987) 165 ITR 90 (Cal), he submitted that the Hon’ble High Court has held that where the conditions of service clearly stipulated that the assessee’s services could be terminated at any time on giving three months notice and there was no obligation on the employer to pay anything to the assessee in connection with the termination, payment made ex- gratia, therefore, totally voluntary and not compensation which implies some sort of obligation to pay and cannot be taxed as profits in lieu of salary within meaning of section 17(3) of the Act. Referring to the copy of letter of probation dated 20.07.2020 he drew the attention of the Bench to column 14 of the same which reads as under: “14. Notice Period : During the period of probation, your employment can be terminated without any notice or assigning any reason thereof on either side. On confirmation your employment can be terminated by one month’s notice in writing or pay in lieu thereof on either side.”

He accordingly submitted that the decision of the Hon’ble High Court of Calcutta cited (supra) is squarely applicable to the assessee.

The Ld. Counsel for the assessee referring to the decision of the Pune Bench of the Tribunal in the case of Mahadev Vasant Dhangekar vs. ACIT (2023) 149 taxmann.com 170 (Pune-Trib.) submitted that the Tribunal in the said decision has held that where the assessee had received Rs.47.21 lacs from the erstwhile company as ex-gratia and letter has been issued by the employer which clearly stated that payment of amount has been made voluntarily to the assessee and was not compensation without establishing letter as non-genuine or without examining sanctity of payment made simply invoking provisions of section 17(3)(iii) for making addition was not justified. 18. Referring to the decision of the Delhi Bench of the Tribunal in the case of ITO vs. Avirook Sen (2024) 161 taxmann.com 462 (Delhi – Trib.), he submitted that the Tribunal in the said decision has held that where the assessee has received certain amounts as lump sum amount after his termination from the service as a settlement out of court with his employer and said payment was voluntary in nature without there being any obligation on part of employer to pay further amount to assessee in terms of any service rule, such payment would not amount to compensation in terms of section 17(3)(i). 19. Referring to the various other decisions as per case law compilation, he submitted that the amount received by the assessee cannot be termed as compensation in terms of section 17(3)(i). 20. The Ld. Counsel for the assessee submitted that in case of the following employees where they have also received similar amounts from Pfizer Healthcare India Pvt. Ltd., the said amounts have not been added by the respective AOs in the reopening assessments treating the same as capital in nature.

He accordingly submitted that the CIT(A) / NFAC is not justified in sustaining the addition of Rs.57,12,673/-.

The Ld. DR on the other hand heavily relied on the order of CIT(A) / NFAC.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case rejected the claim of relief u/s 89 of the Act of Rs.18,74,899/- on income of Rs.57,12,674/- treating the same as income u/s 17(3) of the Act. We find the CIT(A) / NFAC upheld the action of the Assessing Officer, reasons of which are already reproduced in the preceding paragraphs. The CIT(A) / NFAC also rejected the alternate claim of the assessee that such amount being a capital receipt cannot be brought to tax. It is the submission of the Ld. Counsel for the assessee that in case of various other employees who have received similar compensation, the same has been accepted as capital receipt by the respective AOs in re- assessment proceedings and no addition has been made. Further, various Co-ordinate Benches of the Tribunal in similarly placed employees have also treated such compensation received on termination of service as capital in nature and not falling u/s 17(3) of the Act. 24. We find the Assessing Officer in the case of Sharad D. Magar, who also resigned voluntarily from service of Pfizer Healthcare India Pvt. Ltd., Aurangabad has accepted the compensation received at Rs.30,49,176/- as capital in nature by observing as under: “Brief facts of the case: The assessee, Shri Sharad Daulatrao Magar, having PAN: ASHPM1986C, an salaried individual, had filed ITR-1 u/s. 139(1) for AY 2019-20 on 29.07.2019 declaring total income of Rs.32,03,150/-. Further, Rs.35,54,140/- was shown as Gross Salary. The assessee was employee of M/s Pfizer Healthcare India Pvt Ltd, Aurangabad during FY2018-19. The company launched VRS beneficial to the employees on planned closure of its unit. The assessee voluntarily resigned from service w.e.f 08.02.2019 and received compensation and out of that compensation he claimed Rs.30,49,176/- being salary claimed in Advance as exempt u/s 89 from taxation in his ITR u/s 139(1) of the Act. …….. 14. The submissions made by the assessee have been examined. As the assessee has submitted corroborative and binding judicial

In the remaining cases also, the respective AOs have treated such compensation as capital in nature. We, therefore, find merit in the arguments of the Ld. Counsel for the assessee that when the concerned AOs after reopening of the assessment have treated such compensation as capital in nature and the Revenue has not challenged the same and which has attained finality since no 263 proceedings have been initiated, therefore, the assessee’s case being identical to the facts of the other employees of Pfizer Healthcare India Pvt. Ltd., the CIT(A) / NFAC is not justified in sustaining the addition made by the Assessing Officer.

We further find the Hon’ble Calcutta High Court in the case of CIT vs. Ajit Kumar Bose (supra) has observed as under: “4. The amount in question was received by the assessee from his employer. It was received by him in connection with the termination of his service. But the question still remains whether it was compensation. Since it was received by the assessee in connection with the termination of his employment, the term "compensation" would be referable to that event. In other words, it is to be seen whether the amount was paid as compensation for the termination or in lieu of the termination of the employment.

The letter issued by the employer dated July 3, 1969, stated that the amount was being paid ex gratia. There is nothing to indicate that the assessee was entitled to continue in the employment of the company up to any particular age. Under the conditions of service, his services were liable to be terminated on giving three months' notice without assigning any reason. Under the circumstances, it cannot be said that the assessee was entitled to remain in service for any period longer after the requisite notice has been given or that the employer was under any obligation to pay anything to the assessee in connection with the termination of his employment other than the salary for the period of notice. Under the circumstances, in its true nature and character, the payment was ex gratia, that is to say, totally voluntary; it was not compensation which implies some sort of an obligation to pay.

In this view, it cannot be said that the amount in question was profits in lieu of salary within the meaning of Clause (3)

The question of law referred to us in this case, namely : "Whether, on the facts and in the circumstances of the case, the amount of Rs. 24,933 received by the assessee could be treated as income under the charging section or under the section dealing with the computation of income of the assessee ?" 8. is answered in the negative, in favour of the assessee and against the Department.”

We find the Delhi Bench of the Tribunal in the case of ITO vs. Avirook Sen (supra) at para 12 of the order has observed as under: “12. As the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of employer to pay further amount to assessee in terms of any service rule. it would not amount to compensation in terms of section 17(3)(i) of the Act. The impugned addition was rightly deleted by the Ld. CIT(A). The aforesaid point is accordingly determined against the revenue department. The appeal is accordingly not sustainable as we don't find any error of law or fact in the impugned order passed by Ld. CIT(A). The department appeal is liable to be dismissed.”

The various other decisions relied on by the Ld. Counsel for the assessee placed in the paper book support his case to the proposition that the payment of ex-gratia compensation received by the assessee was voluntary in nature without there being any obligation on the part of the employer to pay further amounts to the assessee in terms of any service rule and therefore, would not amount to compensation in terms of section 17(3) of the Act. We, therefore, set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition. The grounds raised

In the result, appeal of the Assessee is allowed.